Market Beat: Retirement plans for small business owners
June 14, 2018
If you're self employed you have some very good options to consider when choosing the type of retirement account that is best for you, depending on your circumstances.
You can always establish a traditional IRA or a Roth IRA for yourself individually. The contribution limits are the same for both plans, $5,500 and you can add another $1,000 if you're over the ripe old age of 50. The difference between the two plans is the way that they are taxed. With a traditional IRA, the contributions are tax deductible and the distributions after you retire will be subject to income tax. With a Roth, you contribute an after-tax dollar and down the road after you retire you'll have an income tax free stream of retirement income to look forward to.
To increase your contribution limits you can set up a SEP IRA. SEP stands for simplified employee pension. With a SEP you can contribute 25 percent of your income or $55,000. These plans are good for self employed with no employees.
In the event that you have some employees you might want to consider using a SIMPLE IRA. With a SIMPLE you can contribute $12,500 if you're under the age of fifty and $15,500 if you're over the age of fifty. Employees can be added to the plan and you can make employer contributions for your employees. You must contribute 2 percent of income for every eligible employee or match up to 3 percent of their income if you use a matching contribution.
An owner only 401k plan will allow for some good contribution limits, too. For the 2018 tax year, the elective deferral limit is $18,500 and you can add 25 percent of your compensation or 20 percent if you're a sole proprietor or schedule C taxpayer. That means with about $70,000 in profits for the year your total contribution limit would be over $30,000.
One thing that all the above retirement plans have in common is that they are known as defined contribution plans. That means that you know how much you're contributing each year, but the amount you can withdraw is an unknown.
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Defined benefit pension plans can also be established where you can define how much income you'll receive in retirement. Defined benefit plans have high contribution limits and can work well in conjunction with defined contribution plans or by themselves to provide retirement income.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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